HMRC can currently collect debts of up to £3,000 by adjusting an individual’s Pay As You Earn (PAYE) tax code which applies to their employment or pensions income. This collection method is known as ‘coding out’. The effect of this is to recover the debt from an individual’s income, by increasing the amount of tax that is deducted from their income during the tax year.
Currently the limit set on the amount which can be recovered this way is £3,000, however for those with PAYE earnings of £30,000 or more the amount which can be recovered via coding out will be increased from April 2015 to a possible maximum of £17,000. The amount which can be collected increases using a sliding scale of band earnings, for example those with annual PAYE earnings of between £40,000 but less than £50,000 could have debts of £7,000 collected this way. If an individual’s earnings are less than £30,000, there is no change to the £3,000 coding out limit.
These changes will only apply to underpaid Self Assessment and Class 2 National Insurance debts and Tax Credit overpayments. Changes will be reflected in 2015/16 tax codes. If an individual does not want the debt coded they should arrange to pay off the debt or agree a suitable payment plan with HMRC.
The current £3,000 coding out limit will still apply to the collection of Self Assessment balancing payments and PAYE underpayments.
If you don’t want the debts to be included in your tax code, then you will need to pay the full amount you owe or speak to us to agree a suitable payment arrangement.